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Are UAE banks broke?
Despite government bailouts, tight liquidity persists throughout the Emirates.
May 7, 2010 10:18 by Emily Meredith
Though certain loans have yet to be classified as non-performing, many are not being repaid. The sensational stories of cars left at the airport hide a slightly less exciting issue – if those cars were bought with loans, no one is making repayments.
If the banks are as highly leveraged as their customers and people stop making loan payments, the institutions become cash constrained. In what could to be an effort to force banks into transparency, the central bank does not appear to be making any more loans just yet, even though liquidity remains tight. And the banks that are publicly traded have another consideration: fearful shareholders who have already lost confidence in the local market may be further deterred by more losses.
Both Abu Dhabi and Dubai based banks had significant exposure to Dubai World. The IMF estimates that half of Dubai World’s interests lay in Nakheel and Limitless World, which focused on overseas real estate investment. When global demand for real estate fell off in 2008, cash stopped going into the highly leveraged companies.
The IMF says that UAE domestic credit growth from 2004 to 2008 was some of the fastest in emerging markets. But over the same period, liabilities owed to foreign banks doubled as a ratio of GDP.
Dubai World played a major role in the economic health of the emirate’s economy. As part of the “Dubai, Inc.” network of commercial companies and investments either owned by or associated with the Dubai ruling family or the government, it received considerable support. The heavy investment in the oversaturated local real estate market, often through debt financing, put the companies in a precarious position. Dubai World largely used short-term debt to finance the mega-projects. When it announced the standstill on loan repayment in November, it effectively froze the local economy. In the boom, some banks had loan-to-deposit ratios over 100 percent, meaning that banks were overstretched – they’d lent out more cash than they had in assets.
The central bank gets its funds from the other emirates, including cash-rich Abu Dhabi. Any requirements on the parts of the banks can still be met by the central Bank’s current reserves. Money from Abu Dhabi came to Dubai’s rescue when the central bank fully subscribed to $20 billion bond from the government of Dubai.
The S&P report predicts a slowdown in retail lending (citing expatriate layoffs in the real estate and financial services industries, and that non-performing loan ratios should peak by midyear 2010. The country remains wealthy though, and a recent report from Booz & Co. says that resource rich Gulf countries will recover faster than the rest of the world.